Question: In some markets cutthroat competition can exist even when
In some markets, cutthroat competition can exist even when the market is dominated by a small handful of competitors. This usually happens when fixed costs are high, products are standardized, price information is readily available, and excess capacity is present. Airline passenger service in large city-pair markets, and electronic components manufacturing are good examples of industries where price competition among the few can be vigorous. Consider three competitors producing a standardized product (Q) with the following marginal cost characteristics:
MC1 = $5 + $0.0004Q1 (Firm 1)
MC2 = $15 + $0.002Q2 (Firm 2)
MC3 = $1 + $0.0002Q3 (Firm 3)
A. Using each firm’s marginal cost curve, calculate the profit-maximizing short-run supply from each firm at the competitive market prices indicated in the following table. For simplicity, assume price is greater than average variable cost in every instance.
B. Use these data to plot short-run supply curves for each firm. Also plot the market supplycurve.
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